Bankers see low metals prices as bonanza for streaming finance firms

Wed Mar 9, 2016 12:24pm EST
 
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By Euan Rocha

TORONTO, March 9 (Reuters) - The prolonged slump in metal prices could turn out to be a long-term bonanza for streaming companies that have rapidly emerged as the go-to financiers for debt-laden miners, say top industry bankers.

Streaming companies such as Franco-Nevada, Royal Gold and Silver Wheaton provide upfront funds for miners in exchange for a portion of a mine's future output. For years mid-sized miners with limited access to capital had turned to these companies to fund construction of typically middling assets, often deemed not lucrative enough to woo top miners.

While larger miners often previously scorned such deals, the extended metal price rout has dented their balance sheets and forced them to book massive writedowns and trim debt in the face of ratings downgrades.

This has pushed many of the world's largest miners such as Glencore, Barrick Gold and Teck Resources , to turn to streaming companies for deals on some of their most attractive, low-cost, long-life assets in a bid to raise cash.

The latest deals are game changers for streaming companies, despite the typically low returns they generate, said bankers speaking at the PDAC mining convention.

"If a very high quality asset goes to market, it'll sell at a very good valuation, because they're very hard, or impossible to replicate in many cases," said Peter Collibee, Scotiabank's head of mining. "So are the rates of return too low? I'd argue not, because of the uniqueness of these assets."

Although streaming firms could lose money in the event of failure of the projects or companies they fund, bankers say the positives outweigh the negatives. They see major upside in many of the tier one assets streaming firms have struck deals around, as additional exploration could significantly expand reserves at those mines.

"It's long been said the best place to find a mine is right beside another mine, and just look at the land packages some of these streaming transactions have captured," said RBC's head of mining David Shaver.

Streaming firms doing these deals also have "very low costs of capital," notes TD's Deputy Chair of Investment Banking Rick McCreary. He said streams on top tier assets should generate a lot of cash flow when commodity prices turn higher, and he expects a sharp turn higher eventually, given the paucity of new finds.

"I've been doing this for 30 years and I've never seen a rate of exploration success this low," said BMO's co-head of mining Egizio Bianchini. (Reporting by Euan Rocha; Editing by David Gregorio)